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Profit Potential Teeters On A Knife's Edge

Katie Micik Dehlinger
By  Katie Dehlinger , Farm Business Editor

The 2018 growing season opened with real potential for profits. The outlook was still lean, but years of belt-tightening looked like it would finally pay off. Corn production costs declined $25 an acre from 2017, while soybean costs dropped by $12, according to a study by Purdue University agricultural economist Brent Gloy.

The theoretical 2,600 acres Indiana corn and soybean farm used in his models saw per-bushel production costs of $3.71 on corn and $9.51 on beans, leading to several yield and price scenarios that could produce a profit.

The market rallied through late May, but took a swan dive in early June as planting progressed, trade rhetoric grew heated, and the odds of a tit-for-tat tariff dispute with China swelled.

The soap opera-esque back and forth--we’re best friends on Tuesday, mortal enemies on Thursday and getting along at a family picnic on Saturday--is particularly hard to predict. Markets and, more importantly, people don’t like uncertainty.

“Nobody knows what the story is other than it seems to be heading down a path that’s looking worse all the time,” Gloy says. It took a mere three weeks for the drama to reverse the profit picture, but just as farmers have become more disciplined managers of their cost structure, so too have they with their marketing.

A poll of 422 DTN readers at planting time found 25 percent had already forward contracted or priced between a quarter and half their anticipated soybean production. Twenty-one percent had already marketed more than 50 percent of it. Farmers hedged a smaller amount of their corn crop, with 25 percent saying they’d locked in prices on 11 to 25% and 20 percent saying they’d sold 26 to 50%.

Gloy says he’s seen a number of similar surveys, and they all show a range of sales, with some farmers pricing a lot and others marketing very little. Hedging will boost those farmers’ bottom lines, but those that weren’t as proactive shouldn’t lose hope.

“We’re on what I call a knife’s edge,” Gloy explains. “Smalls swings can be the difference between economic profits and economic losses, and we just need to keep that in mind. It wouldn’t take a huge swing to put us right back where we were, where we could have economic profitability … It’s not like we have to have corn prices go up a dollar for everybody to make money. So, they’re within the realm of feasible.”

He says it’s easy to fall into a trap of thinking down markets will always keep falling, just like it is to think rising prices will keep going higher.

“It’s good to remind people to remain vigilant. Remain focused. Make good decisions through all of this uncertainty. Keep it calm, and make good, rational decisions. We’ve got a lot of growing season left.”

Read Katie’s Business blog at www.dtnpf.com/agriculture/web/ag/perspectives/blogs/minding-ags-business

katie.dehlinger@dtn.com

@KatieD_DTN

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Katie Dehlinger